The Federal Reserve Board of Governors has proposed slashing the cap on the
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"The debit card related costs incurred by large debit card issuers have changed significantly since the interchange fee cap was established," Fed Vice Chair for Supervision Michael Barr said during a public hearing Wednesday afternoon. "The proposed rule would update the interchange fee cap for the first time since it was adopted to reflect the changes in debit card related costs, so that the cap remains reasonable and proportional to these costs."
The base component would fall from 21 cents per transaction to 14.4 cents, while the so-called ad valorem element would be multiplied by 4 basis points instead of 5 basis points. The fraud-prevention adjustment, meanwhile, would tick up slightly from 1 cent to 1.3 cents.
Overall, under the proposed framework, the interchange fee a debit card issuer could charge on a $50 transaction would be capped at 17.7 cents, down from 24.5 cents under the current rule, a decrease of nearly 28%.
The proposal also calls for the Fed to re-evaluate its cap on swipe fees every two years, using data that it has been collecting for more than a decade. Data would continue to be gathered in odd-numbered years, but the board would have to announce changes by March 31 of those years and implement them by July 1. These biannual changes would not be subject to public comment.
If adopted, the rule would be a blow to banks and exchange network operators, which would see their revenue slashed by the lower cap. Meanwhile, merchants would benefit from the lower payment costs. Proponents of lower exchange fees say this cost savings will be passed along to consumers, but banks and their allies question the degree to which lower swipe fees will be baked into goods and services. They also say the shift will force banks to increase costs elsewhere.
The Fed's proposal drew a strong rebuke from Fed Gov. Michelle Bowman, the designated board member to represent community banking interests.
In a statement released alongside the proposal, Bowman said the data about falling costs for debit card issuers that underpins the proposal was aggregated across the entire banking system and is skewed down by the largest debit card issuers, which benefit from economies of scale. Meanwhile, she said, many smaller institutions already run their debit programs at a loss.
"While today's rule acknowledges the varied size, business models and product offerings of banks subject to the interchange fee cap, the fee cap aims to achieve 'rough justice' by establishing a single cap that applies to all covered issuers," Bowman said.
Bowman argued that the reliance on a single system for calculating swipe fee caps would be "regressive," as it would put the greatest pressure on the smallest debit card issuers, many of which rely more heavily on the retail side of their business than their larger competitors, which tend to have large commercial banking operations, too.
A provision of the Dodd-Frank Act of 2010 — often referred to as the Durbin Amendment — requires the Fed to maintain a cap on debit interchange fees and collect data on activity in the space. The Fed implemented this requirement by creating Regulation II in 2011.
Under Regulation II, the Fed could establish a tiered approach to interchange caps, one tailored by issuer size. A senior Fed official said the Fed determined such an approach would be too difficult for banks to implement and opted for a single cap instead. The official said the board did not consider deviating from that approach when compiling this proposal.
Like the current limit, the proposed cap would only apply to banks with at least $10 billion of total assets, an exemption that spares the country's smallest banks. But, Bowman said, the rule change could have ripple effects that touch institutions of all sizes.
"These smaller debit card issuers do not exist in a vacuum," she said. "Issuers of all sizes use the same payment rails, and smaller issuers inevitably face some degree of pricing pressure, at least indirectly, from the interchange fee cap."
While the Fed can set the maximum amount that can be charged on a debit transaction, the actual amount charged and the way that revenue is divided is determined by card issuers and network operators.
Debit cards are the most popular type of non-cash payment in the country, according to data compiled by the Fed and released alongside the proposal, accounting for more than 92 billion transactions valued at $4.3 trillion in 2021.
Interchange fees collected in 2021 totaled $31.59 billion according to the Fed report — an uptick of more than 19% over the prior year and a record high since the central bank began tracking fee activity. Much of this growth has been driven by card-not-present transactions, such as online purchases.
The report notes that the cost of processing transactions has roughly been cut in half since 2009, costing card issuers less than 4 cents per transaction in 2021.
But industry participants say this increased use of debit cards and reduced per transaction cost does not mean that banks and payment networks have reaped outsize profits.
Richard Hunt, executive chairman of the Electronic Payments Coalition — an industry association representing banks, credit unions and payment networks — said the fact that interchange fees have not increased since the implementation of Regulation II has been advantageous to merchants.
"The only things that have remained flat since 2016 are credit card interchange rates, pancakes and to some people the Earth," Hunt said in a statement prior to the official release of the proposal. "What the Fed should be discussing right now is how this terribly flawed policy has totally failed to deliver on a single promise — from lower costs to so-called exemptions for community banks — and harmed American families in the process."
The proposal will be open to public comment for 90 days.
